European Majors Look for Role in Energy Transition

April 5, 2016 | 00:00

European Majors Look for Role in Energy Transition

As the focus on carbon dioxide emissions has grown over recent years, the European oil and gas majors (Shell/BG, Total, BP and Eni) have moved production profiles towards lower carbon gas, through a massive expansion in global LNG capacity, culminating in the formation of the biggest gas supermajor of all in Shell/BG last year. Now, unlike their North American counterparts, some appear to be considering an even greater plunge into the new more...

As the focus on carbon dioxide emissions has grown over recent years, the European oil and gas majors (Shell/BG, Total, BP and Eni) have moved production profiles towards lower carbon gas, through a massive expansion in global LNG capacity, culminating in the formation of the biggest gas supermajor of all in Shell/BG last year. Now, unlike their North American counterparts, some appear to be considering an even greater plunge into the new more sustainable energy world, but with the “gas bridge” covered, it is less clear how to proceed.

The question of what role they should play in Europe’s energy transition is particularly poignant in the wake of the Paris COP21 Agreement last December, which confirmed the trajectory of a journey already underway for several years, away from fossil fuels.

The oil and gas industry is in a great position to capitalize on the energy transition, due to its deep pockets, project management expertise, energy focus and R&D capabilities. But big oil is wary of low returns in renewable energy, and it is a struggle for major oil companies to incorporate a move towards ever cleaner energy into decision making, alongside the traditional objectives of making money and securing reserves. The challenge for them lies in reducing emissions in an economically attractive, low-risk, and technically feasible manner.

“The key challenge for the energy industry in the 21st century — if not for the world — will be to overcome this nexus between energy security and environmental sustainability, and transition the energy system in the most optimal way,” said leading oil services giant Schlumberger in a recent article.

Gas revolution

The majors’ strategy to expand gas has been underway for some time now, and has recently been accompanied by strong lobbying of the EU by the big four and others to encourage policies more favourable to gas, including a carbon price floor. Advocates claim renewables complemented by gas could quickly replace coal-fired capacity and help Europe achieve its ambitious 80% greenhouse gas emission reduction target by 2050. They say the benefits of transitioning the European energy system in this way include significantly lower investments, less risk, and a reliable and secure energy system.

The EU is listening, having switched renewable targets to emissions targets after 2020, which will allow gas to contribute. It has also given its blessing to a beefed up Emissions Trade System (ETS), and national floors to carbon pricing, such as that being considered for the UK and elsewhere.

The European majors already assume that they will have to pay a carbon tax. An executive at Total said that his company uses a price of €35 (US$39) per tonne when assessing new projects. A levy of around that level could be enough to make gas more competitive than coal for power generation, provided gas prices do not rise sharply again.

But to keep global temperatures within 2 °C of pre-industrial levels — the official goal of United Nations climate negotiators, and aim of COP21 — the carbon price would potentially have to ramp up quickly from around $20 a tonne in 2020 to $100 a tonne in 2030 and $140 in 2040, according to the International Energy Agency [1]. This creates considerable uncertainty for longer term gas investment.

“Gas is already facing quite a bit of policy uncertainty in the UK (and Europe more generally) as it has a clear short term role in decarbonisation but no clear long term role. [UK Energy Minister] Amber Rudd's 'reset' speech promised to clarify, but in fact compounded, the uncertainty, suggesting both that gas policy could be left to market forces and that it is imperative to build more gas-fired power plants,” said Malcolm Keay of the Oxford Institute of Energy Studies.

While a carbon tax would boost gas use relative to coal, both have seen market share and prices fall due to rising renewable flows, which makes investing in efficient combined-cycle gas turbine (CCGT) plants less attractive. In addition, any policies to mandate the use of renewable energy or to improve energy efficiency would make gas less attractive to investors, while an advance in battery technology could undermine gas’ position completely.

Higher carbon prices could stimulate the development and use of carbon capture and storage (CCS) technology, although the first gas-fired CCS project – lead by Shell in Peterhead, Scotland – was dropped late last year when government support was removed. In any case, very high carbon prices would also make renewables more competitive, possibly at the expense of gas with CCS.

In a new report, the World Energy Council has given its backing to gas, predicting that more countries are likely to follow in the footsteps of the US and develop their unconventional gas resources, which should make availability plentiful at low prices. Shale, however, is where Europe is failing to act. Bans on shale gas extraction across Europe leave the UK and Poland as the only countries carrying out such operations. Majors are on the side-lines, having pulled out of positions in Poland, although Total has established a significant licence position with GdF in the North of the UK.

The positions of European majors in LNG make up for this to some extent, along with new finds in the eastern Mediterranean, such as Zohr by Eni, and plans in the US to export large volumes of low cost shale gas as LNG to Europe. Global LNG supplies are expected to increase more than demand over the next 4-5 years, providing plentiful supply for Europe’s markets at prices that could compete with coal in the European power sector, especially if combined with a carbon tax.

Into the unknown

Beyond the shift to gas, oil and gas companies are wary of what the next stage of energy transition has in store, with the solar and wind industry structure proving far less conducive to high returns than oil or gas. Investing in new forms of energy, especially downstream is uncertain and heavily dependent on power market design, industry conduct and technology development.

North American majors are not keen. “We choose not to lose money on purpose”, said ExxonMobil’s Rex Tillerson of renewable investment last year. However, building privileged positions at scale in the oil and gas sector is also becoming increasingly difficult, and even with a modest price on carbon renewable energy resources like wind and solar look more attractive, especially with costs continuing to fall steadily.

Consequently, some European majors are turning to energy provision. Total, for example, plans to invest $500 million a year in renewable energy, including in biofuels and solar. It said in a September 2015 presentation that it wanted to take “advantage of [the] fast-growing renewable market” to build a profitable business. Earlier last year Total said it would invest € 200 million to transform its unprofitable La Mede oil refinery into a biofuel plant, and the company has already invested heavily in solar manufacturing, buying a $1.4 billion US plant in 2011.

Shell’s CEO, Ben van Beurden has also acknowledged the importance of solar: “Solar energy is to be the future backbone of the world’s energy system”, and both Shell and the other European majors are reported to be considering investments in the energy transition. Options include providing flexibility around intermittent renewable energy supply, with gas based systems eventually moving to hydrogen using existing infrastructure. This could be combined with entry into the smart energy market, closer to the consumer.

While options are no doubt being considered, there is unlikely to be a major flood of investment away from upstream oil and especially gas, at a time when the industry is cutting back dramatically due to lower prices. If European majors do eventually switch more to a combination of gas and alternative energies, an important consideration will undoubtedly be the extent to which gas is embraced as a low-carbon fuel.